Marijuana Businesses Navigate Prohibitive Federal Tax Law

Due to a decades-old law, legal marijuana businesses are facing federal tax rates of 70 percent or higher

A decades-old tax law is threatening the future of legal marijuana businesses. Credit: Frederic J. Brown/Getty

Nearly a month after Tax Day, legal marijuana businesses are reeling from the effects of a federal law targeting the illegal drug market, The New York Times reports.

The law, which is known as 280E and dates back to 1982, prevents any business from taking tax deductions or credits if its trade "consists of trafficking in controlled substances" – specifically those that are schedule I or II, as defined by the Controlled Substances Act. Marijuana, like heroin and ecstasy, is considered a schedule I substance.

The law makes it so dispensaries and other marijuana-businesses in jurisdictions where the drug can be purchased legally cannot claim deductions that would be reasonable for other businesses, like rent, employee salaries and utility bills. The Times reports that the law has crippled the hiring process at some businesses, and that many owners have only found out about the legislation after being audited by the IRS.

Colorado and some other states now allow marijuana-related businesses to take deductions on their state returns, but those state laws don't protect them from the IRS.

Where a normal business might face a 30 percent federal tax rate, some marijuana businesses are facing rates of 70 percent or higher, according to The Times' reporting; one Colorado dispensary reportedly received an $866,000 tax bill after making $1.7 million last year.

With an eye toward changing 280E, two Oregon Congress members – Sen. Ron Wyden and Rep. Earl Blumenauer, both Democrats – recently submitted the Small Business Tax Equity Act of 2015. If passed, the law would provide an exception that allows "businesses operating in compliance with state law to take deductions associated with the sale of marijuana like any other legal business," according to a summary on Blumenauer's website.

Overturning the 1982 law "is the last domino that has to fall for us to be treated like any other business in the country," Tim Cullen, a co-owner of five marijuana shops in Colorado, told The Times. "We're not a black-market cocaine dealer. We're totally on board and on the level. We'd like to be treated as such."

Marijuana is legal for either recreational or medical use in 23 states and the District of Columbia; Puerto Rico legalized medical marijuana earlier this month.